"IMF's Chief Economist Gets Set for the Next Move"
An Interview with Kenneth Rogoff Economic Counsellor and Director, Research Department
International Monetary FundEconomic Times, July 18, 2003

NEW DELHI: A fortnight ago, ET caught up with the chief economist designate of the IMF, Raghuram Rajan, in Chicago. On Thursday we spoke with Kenneth Rogoff, the incumbent chief economist and a former chess grandmaster, who was in Delhi to deliver a lecture on `Financial Globalisation' at the invitation of the Indian Council Research on International Economic Relations. Excerpts of an exclusive interview with ET:

It's been almost three months since the IMF came out with its World Economic Outlook. How do you see the global economy today?

Our forecasts in the April World Economic Output (WEO) were fairly conservative. We were below consensus then. But since then forecasts regarding Europe are sharply down, other forecasts elsewhere too have veered round more or less to our view so we are now re-assessing the whole situation. I'm afraid I really don't have a more definitive answer to your question.

How do you think the US current account deficit will get resolved? Do you subscribe to the view that Asian economies are holding up the currency realignments needed to resolve the problem?

The US current account deficit is an open question. Asian economies are clearly a piece of the overall problem of the US current account deficit so if the Asian currencies were to appreciate against the dollar, that would have some effect though I would be cautious not to over-rate that. There is a long lag between exchange rate changes and its effect on the trade balance. In the short-run, there can even be a reverse effect — you know, the J curve effect so the big stimulus really has to come from a rise in US savings and in expenditure on US goods from the rest of the world.

You are a strong advocate of floating exchange rates. Can India cope with the volatility that such a policy brings in its wake?

My case is not so much for floating exchange rates as much as for more flexible exchange rates. In fact there is hardly any country that allows its exchange rate to float entirely freely; most have the exchange rate in their monetary policy target, either directly or indirectly. Numerous studies have shown that the costs of exchange rate volatility are in reality much less than what most policy makers imagine. Part of the reason for this is that prices of goods don't respond as quickly as one might imagine — the pass through effect of changes in exchange rates is lower that what one might expect.

Is the concern over fiscal deficit overdone in the Indian context given that both interest rates and inflation are well under control?

Well, you must remember that we're now in a phase where global interest rates are astoundingly low. But interest rates are bound to reverse and when that happens you are going to see an impact. Indian financial markets are relatively closed but even so it is going to affect India as well. It's difficult to calibrate the exact relationship between government debt and interest rates but by and large, higher public debt does result in higher interest rates. The current trajectory of India's fiscal deficit is going to impact real interest rates. Short-term fortuitous benign factors should not blind us to long-term consequences.

How much influence does the chief economist have over IMF policy, in particular lending decisions or are they fated to be essentially political?

The executive board of the IMF represents governments so political considerations do play a part. But beyond that, economic analysis also plays an important role because the IMF, you must remember, is also concerned about sustainability.

You have been quoted as saying that India seems to have learnt the wrong lessons from the East Asian crisis. Could you elaborate.

I think India benefited from its relatively closed capital account during the East Asian crisis. My worry is that this seems to have been extrapolated as an argument against all kinds of openness, especially openness to trade.